Red Herring Filing

What is Red Herring Filing?

Red herring refers to the initial prospectus that the issuing company files with the SEC (Securities and Exchange Commission). This prospectus lays out the terms and conditions of the initial public Offering. The red herring file is designed to provide the investors with information about the issuing company, the capitals, growth and expansion plans, and other such details. The prospectus tells the price of the shares as well as the total shares the company offers.

Before the company gets approval for releasing the shares to the public, they are supposed to draft the initial prospectus followed by a couple of files. The Securities and Exchange Commission is responsible for reviewing the red herring file of the issuing company to determine whether or not the organization has followed all the laws associated with the shares. They go over the details to get a clear picture of the shares and prices. They also review the details thoroughly to ensure that the organization has not mentioned false information or anything that violates the regulations.

How Does SEC Approve Red Herring Prospectus?

SEC makes it mandatory for people to show the required information to the public. It is important for the issuing company to disclose the information about the shares, its prices, and the company’s details so that it gets easier for the investor to make an accurate decision. This prospectus gets its name from the disclaimer that’s published on the front page of the prospectus in red.

This disclaimer says that the company has filed the prospectus with the SEC, but it is yet to come into effect. That means the details mentioned in the red herring file can be altered in the future. It is important to note that the securities will not be available for sale until they get effective.

The Final Draft

Take the drug approval file, for example. When a company launches a new drug or food product, they are supposed to draft a file that specifies the ingredients added to the products, its specifications, uses, side-effects, and the results of the test. However, this file is only the preliminary prospectus that seeks FDA approval. Until the Food and Drug Administration approves the request, the supplier cannot make the product available for sale. Similarly, the issuing company cannot issue the shares until they get approval from the Securities and Exchange Commission.

Once they get the approval, the issuing company creates the final draft that states the share prices and issuing size. Technically, the prospectus isn’t approved. SEC only checks and confirms all the details mentioned in the prospectus to ensure that all the required information is disclosed properly. The red herring prospectus acts as the file containing information about the company’s offering. The SEC could ask the company to make changes to the draft or revise the document if they find any errors. The prospectus provides information about the organization, how it intends to use the proceeds, and the shareholders details.